Jeff Erxleben tells the Commercial Observer where CRE financing is headed in 2024

DALLAS (Jan. 9, 2024) — After months of stagnant capital markets and the 10-year Treasury fell below 4% in December, commercial real estate (CRE) capital markets looked like they hit bottom in 2023.

However, as the federal funds rate will remain at 5.25% to 5.5% for the foreseeable future, things are looking up for CRE capital markets.

But where will this money go?

President of Debt + Equity Jeff Erxleben discussed this topic and more in the Commercial Observer article titled, “CRE finance may have hit bottom in 2023. What’s Next?

“The typical profile of a multifamily deal and CLO (collateralized loan obligation) loan that was placed during this peak cycle over the last several years is higher leverage, north of 75 percent or 80 percent, with future fundings for value-add rehab,” Erxleben said. “Most of the collateral is good real estate — it’s well performing, it’s just an issue of having a capital stack that doesn’t work.”

Erxleben said the underlying cost of capital for many CLO loans was tethered to the secured overnight financing rate (SOFR) — the interbank lending rate — at a spread of 300 basis points or higher. As SOFR now sits at 5.31%, these loans are maturing at an 8% or 9% clip when they were underwritten to perform when SOFR was less than 1%.

“Then there’s (interest rate) cap replacement cost, and they’ve increased substantially — so that’s a trigger event for CLO loans,” Erxleben said. “Those cap (replacement) costs are significant, so when you see cap costs roll off, or there’s been some modification done to the loan, ultimately there will be a sale, and I think those buying opportunities will be pretty good.”

Topics covered in the article include:

  • Investor appetite.
  • Lenders’ increased spreads.
  • Debt funds’ unique position.
  • Long-awaited debt and equity capital is here.  

Read the full article.

Northmarq is a full-service capital markets resource for commercial real estate investors, offering seamless collaboration with top experts in debt, equity, investment sales, loan servicing, and fund management. The company combines industry-leading capabilities with a flexible structure, enabling its national team of experienced professionals to create innovative solutions for clients. Northmarq's solid foundation and entrepreneurial approach have built an annual transaction volume of more than $39 billion and a loan servicing portfolio of more than $76 billion. Through the 2022 acquisition of Stan Johnson Company and Four Pillars Capital Markets, Northmarq established itself as a provider of opportunities across all major asset classes. For more information, visit: www.northmarq.com.

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